World economy: China’s expanding investment in global ports

China is making strides towards establishing itself as a maritime power. Besides enhancing the capabilities of its navy, it is also investing heavily in global port infrastructure. From mid-2016 to mid-2017 Chinese firms announced around US$20bn-worth of investment in nine overseas ports, around double that for the year-earlier period. However, several political and economic risks have to be navigated to ensure that this investment delivers returns.

The pace of China's investment in port infrastructure has been picking up. Based on The Economist Intelligence Unit's research, Chinese companies had confirmed seaport investments or port ownership in 34 countries by September 2017, with 12 planned investments in another eight countries.

State-owned enterprises (SOEs) have been the main investors in overseas ports. The pioneer was state-owned COSCO Shipping, the country's biggest shipping line. It has focused on acquiring ports at key nodes within global shipping routes, such as Piraeus (Greece), Euromax (Netherlands) and Said (Egypt). Most of its port investments are in developed countries.

Another SOE, China Merchants Group, is a relative latecomer, but is investing heavily in emerging markets. By end-2016 the company owned or had operational rights to 40 ports in 22 countries, including Nigeria, Sri Lanka, Togo and Djibouti, based on our research. Even in the US, where ports are often off-limits for foreign investors, China Merchants has acquired small stakes in ports in Houston and Miami by buying Terminal Link, a French shipping line.

Most existing or planned investments by Chinese companies have been in deep-sea ports. Since the 2008–09 global financial crisis, the world's merchant fleets have developed ever-larger shipping vessels in order to reduce costs. Deep-sea ports servicing these vessels are more likely to prosper.

Three "blue economic passages"

Planned port investments are mostly along three "blue economic passages", an initiative announced by the National Development and Reform Commission, China's top economic planner, that aims to connect Asia with Africa, Oceania and Europe under the banner of the Belt and Road Initiative (BRI).

The main focus of attention is the "passage" running from China to the Indian Ocean, Africa and onto the Mediterranean. This is tied to other flagship BRI projects, such as the China-Pakistan Economic Corridor and the Bangladesh-China-India-Myanmar Economic Corridor. Along this route, Chinese companies have already made port investments in Gwadar (Pakistan), Colombo and Hambantota (both in Sri Lanka). Four different initiatives are planned for Malaysia. Plans to invest in Tanjung Priok (Indonesia) and Kyaukpyu (Myanmar) are also under negotiation.

The second passage connects with Australia and the Southern Pacific. Australia is the second-largest recipient of accumulated Chinese overall investment. Chinese companies have invested in ports in Darwin, Newcastle and Melbourne. The Port of Darwin exports 35% of Australian livestock and the Port of Newcastle exports 40% of Australian coal; China is a major importer of both products.

The third passage, connecting China with Europe via the Arctic Ocean, is less developed but potentially significant as it could cut shipping times by several days. Planned Chinese-backed projects, under negotiation or bidding, include port investments in Arkhangelsk (Russia), Klaipeda (Lithuania), Kirkenes (Norway) and a deep-sea port in a fjord in northern Iceland.

Why ports?

There are obvious economic benefits that explain China's investment in port infrastructure. China is the world's largest exporter and second-largest importer—its economy is intertwined with global trade. Japan in the 1980s and South Korea in the 1990s also invested heavily in overseas ports as they expanded their global trade footprint. China sees particular potential in developing economies, where trade growth is likely to be strongest in the coming years.

Besides facilitating trade, ports provide broader economic value, such as valuable data on logistics and the local economy. They offer an opportunity to develop related maritime services—including insurance, consulting and the compilation of key industrial indices. Port construction also offers a release valve to China's construction and machinery sectors, which are both suffering from domestic overcapacity. According to local media, China Communications Construction, the world's largest port-building company, had built 95 deep-water berths and sold over 750 shipping container cranes outside China by end–2016.

More controversially, there are strategic advantages from port investment, too, as they bring with them tighter control of key sea lanes and energy supply routes. China's interest in Gwadar, which the state-owned China Overseas Ports has operated since 2013, stems from the opportunity it provides to transport crude oil from the Middle East to western China without having to transit through the Strait of Malacca. There are also potentially military uses from port development, such as the case for ports in Gwadar, Djibouti and the Seychelles. While Colombo and Piraeus have not received official confirmation, they have both had high-profile visits from the Chinese navy.

Benefits for others

There are benefits to host countries, too, given the role China plays as an important trading partner and investor for many. Allowing China's investment in ports helps to strengthen relations between both parties. The government of Abu Dhabi, the capital of the UAE, signed a 50-year lease agreement with the state-owned Jiangsu Provincial Overseas Co-operation and Investment Company in July 2017. This is in line with our view that the UAE is prioritising building influence in China in order to consolidate trade and investment relations.

For developing countries, China can also provide port management on top of capital investment. Ports are often bundled with establishing industrial zones and development plans for areas that surround the ports—the "Shekou Model" that China first piloted in the eponymous coastal city in southern Guangdong province. In similar fashion, China Merchants started to build a pilot free-trade zone in Djibouti in January 2017 after investing in its seaport. The zone may attract more investment from China given that it provides better infrastructure and offers a business environment that Chinese investors are familiar with.

Economic and political risks

There are risks to China's port strategy. The recovery in global trade has been slow in the post-financial-crisis era, prompting debates about whether patterns of trade have fundamentally changed. Increasingly, production is localised rather than built around global supply chains. Innovations like 3D printing also mean that shipping goods may become less necessary. Besides, global protectionist sentiment appears to be rising. In this context there is a risk that Chinese firms may be overinvesting in global port infrastructure.

Another risk for China stems from political mood swings in host countries. Investment in ports can be deemed sensitive, especially if investment by Chinese companies is perceived as tied to broader national strategic goals. Bangladesh cancelled a contract with China to build a deep-sea port at Sonadia in 2016, as it sought to balance its relations with India and the US. Sonadia would have been Bangladesh's first deep-sea port.

In the eyes of some in the Indian government, Chinese investments in Pakistan's Gwadar port, as well as ports in Sri Lanka and Myanmar, form part of the "string of pearls"—a phase referring to a network of Chinese-invested ports across the Indian Ocean. Concerns about whether such ports perform a strategic rather than purely commercial function are given extra weight given the fact that most Chinese port investments are made by SOEs operated by the central government.

Looking ahead, port investment is set to climb higher. Chinese outbound direct investment (ODI) has dropped in 2017 under tighter restrictions governing capital-account transactions. However, in August the State Council (the cabinet) issued rules laying out which sectors were to be encouraged, restricted and banned when it comes to ODI. Logistics was named as a sector that was encouraged.

The biggest challenge for Chinese firms investing in global ports will be profitability. In their eagerness to enhance their presence overseas, there is a risk that companies will invest wastefully, or prove blind to political sensitivities. Careful evaluation of the economic potential of such projects will be required.